Suppose the domestic price of a beer is 300 Kenyan shillings in Kenya and a similar beer costs 30 Mexican pesos in Mexico. If the nominal exchange rate is 0.18 Mexican peso per Kenyan shilling, then what is the real exchange rate?

Question

Quizplus · Accepted Answer

To calculate the real exchange rate, we need to compare the prices of the same good in two countries using the nominal exchange rate. We can do this by dividing the domestic price by the foreign price and then multiplying that ratio by the exchange rate.

Real exchange rate = (Domestic price / Foreign price) x Nominal exchange rate

Real exchange rate = (300 KES / 30 MXN) x 0.18 MXN/KES

Real exchange rate = (10) x 0.18

Real exchange rate = 1.8

Therefore, the real exchange rate is 1.8.

Option B is correct.

Suppose the Domestic Price of a Beer Is 300 Kenyan